Oct 15, 2010

Letting the crooks off the hook; how the AP debt-swap model bails out MFIs.

There is an old Hindi saying. 'Haathi ke daant, khane ke aur, deekhane ke aur'. Translated, it means: Elephants have two sets of teeth. One that it shows, the other that it uses for eating. In lot many ways I find the adage holds true for the politicians as well.

Globally, when politicians are in front of the TV cameras you get to see a visibly concerned face, more often than not it is a fake expression that the politician carries. Once they are off the media glare, they show their true colours. This is what brings me to the true colours behind the Andhra Pradesh government's much publicised move to bring in an ordinance to rein in the erring micro-finance institutions (MFIs).

At the face of it, the proposed ordinance looks to be an outcome of concern. As the Indian Express (Oct 14, 2010) states: 'A special ordinance approved today by the Andhra Pradesh Cabinet to regulate micro-finance institutions (MFIs) is likely to provide for a debt-swapping arrangement wherein high cost debt of MFI customers could be swapped with low interest bearing loans by banks.'

The news report (AP model: swap high cost MFI debt with banks) goes on to say: 'It is learnt that Chief Minister K Rosaiah had earlier explored the possibility of substituting the high cost loans extended by MFIs with low cost debt by asking banks which lent money to MFIs to intervene. "What started off as an initiative for social and economic upliftment of rural poor has now morphed into a highly competitive business with the sole aim of making profits, People are getting caught in debt traps and they see no way out," the CM is said to have said in a meeting on Thursday evening.' 

I am not challenging the intention of the Chief Minister who may probably be trying to stem the rot, but the way the ordinance is drafted (from what appears in the media reports) it is quite obvious that the CM has been misled. His advisors have ensured that the real teeth remains hidden. All his efforts therefore to rein in the criminal activities of the MFIs have actually fallen flat. The ordinance will help the MFIs instead.

That the MFIs have been on a looting spree was never in doubt. Except for the pink newspapers world over, which have always eulogised the corrupt and the crooked, everyone knew how the MFIs were fleecing and harassing the rural poor and charging them punitive interest rates in the name of micro-credit. In Andhra Pradesh, it snowballed into a bigger issue because of the serial death dance in the rural areas.

Because the media had earlier buried the scandalous part, the educated were oblivious of the killing ways of micro-finance. I remember a few months back I was in a radio discussion. Along with me were two senior journalists from New Delhi. Somewhere during the course of the discussion I mentioned about the exorbitantly high rate of interest that the MFIs charge. To my utter surprise and dismay, the two journalists did not agree that the average rate of interest on tiny loans was more than 24 per cent. They had never heard of it. Imagine, if this is the level of ignorance that prevails in the national media, what can you expect from the academicians in the universities/colleges or for that matter from the average person in the street.

Coming back to the AP ordinance, the proposed law makes it obligatory for the MFIs to register within one month disclosing details of the recovery methods adopted. They will also have to disclose the details of the interest rates charged. It bans use of coercion and unethical practices in loan recovery, and also makes such actions cognizable and non-bailiable. Penalty for non-compliance will attract three year imprisonment and a fine of Rs 1 lakh.

Now, let us look at how the ordinance will in fact help the MFIs. A quick analysis by the Deccan Chronicle (Oct 14, 2010) under the headline 'State lets MFIs off the hook ' says it all: "The state government, which promised to rein in unscrupulous micro-finance institutions, has instead given them a bonanza of sorts by deciding to implement the system of credit swapping. The Chief Minister, Mr K. Rosaiah, and the rural development minister, Mr V. Vasanth Kumar, said that public sector banks would be asked take over the loans availed from MFIs to mitigate the troubles of poor borrowers.

The state has taken a leaf from the Siricilla credit swapping model wherein public sector banks were asked to take over the loans availed by weavers from private moneylenders in the backdrop of surge of suicides.

At first sight, the decision looks pro-people. But in actuality, it will only help MFIs which have been harassing borrowers driving many of them to suicide. For one, MFIs will get back their entire money along with interest without incurring any expense in collection. Banks, on the other hand, would have to shell out a whopping Rs 9,600 crore to take over then loans. They would also have to cater to the high interest rates charged by MFIs while charging only permissible interest rate themselves.

Bank officials, who are not amused, also cautioned that if they are forced to take over MFI loans this year, the original bank linkage in the form of Pavala Vaddi and SHG tie up will get affected resulting in total collapse of self help group movement in the state." [See the link: http://www.deccanchronicle.com/hyderabad/state-lets-mfis-hook-813]

Didn't I say in my earlier columns that the MFIs wield tremendous money and political power?

Well, this is not a way to curb a crime that flourishes in the name of helping the poor. The spate of suicides that Andhra Pradesh has witnessed in the past two months certainly calls for more tougher regulations. At the same time, the Andhra Pradesh government needs to file FIRs against the CEOs of the erring companies for their role in the crime. This is nothing short of murder, and the culprits cannot be allowed to go free.

Meanwhile, people's anger is boiling over. I hear reports of SKS offices at a number of places in Andhra Pradesh being ransacked in the past two days. If the politicians and the policy makers refuse to use the legal provisions to nip the evil in the bud, what do you expect the ordinary people to do?

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